Pfizer‘s latest phase 3 trial results put its promising eczema drug on a path to challenge Regeneron and Sanofi‘s $2 billion-per-year drug, Dupixent. Also, how Regenxbio (NASDAQ:RGNX) and Adverum Biotechnologies hope to change how a we treat a common cause of vision loss in seniors, and why United Healthcare‘s (NYSE:UNH) latest quarterly results sent shares soaring. Host Shannon Jones tackles these topics with contributor Todd Campbell on this edition of Industry Focus: Healthcare.
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This video was recorded on Oct. 16, 2019.
Shannon Jones: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every single day. Today is Wednesday, October the 16th, and we’re talking healthcare. I’m joined by healthcare guru Todd Campbell. I’m Shannon Jones. Todd, how’s it going?
Todd Campbell: I’m doing well! As always, looking forward to a packed show today with all sorts of great healthcare updates.
Jones: Oh, yeah, we’re going from small biotechs to big health insurance and big pharma as well. We’ve got a lot of ground to cover.
But let’s kick things off with a company we actually talked about last week in our beaten-down biotechs episode. Certainly check it out if you haven’t. That company was RegenxBio, ticker RGNX. Last week, we mentioned that RegenxBio was going to be presenting updated data for its drug candidate RGX-314 at a medical conference in San Francisco. We got that data last Friday. Todd, before we get into the specifics and what we saw, let’s do a quick recap for any new listeners out there. What exactly is RGX-314? What is it attempting to solve for?
Campbell: This is a gene therapy. The goal here is to design a better way to treat patients with something called wet stage age related macular degeneration. We’ll call that AMD. Wet AMD is not uncommon. It’s pretty common, especially as people get older and live longer. If you look at the statistics of this, you’ve already got between one million and two million people with wet AMD in the United States, I think three million maybe within the developed markets. It’s a multi-billion-dollar blockbuster indication already that’s being addressed by Regeneron, which has a product called Eylea, and Novartis, which has a product called Lucentis. Both of those drugs are $4 billion-plus per year medications that people take to try and inhibit a protein and tackle what is a breakdown in the macula. It negatively impacts the ability for people to see. They end up going legally blind in their senior years. While Lucentis and Eylea work pretty well, unfortunately, they need to be taken very regularly. You can take these things monthly, they can be every eight weeks, they can be every quarter. I’ve had some eye stuff lately that I’ve had to take care of. I was there for multiple Thursdays in a row, talking to this really nice gentleman next to me, and he was there every week for an injection. There’s definitely room for improvement here. What RegenxBio hopes to do is to provide a one-and-done option by using its own vectors to deliver a very specific way of being able to inhibit that protein, it’s long-lasting.
The data that was expected, I think, shone through. It was pretty solid. I think the market reacted negatively because there was some competitive concerns from another company who reported numbers in wet AMD as well. But I think on balance, the data was pretty good. Shannon, if you want to dive into that, we can go right ahead.
Jones: Absolutely. Looking at the data, and this was for an ongoing Phase I-IIA trial in RGX-314. What they saw basically, the majority of patients — 75%, or nine out of 12 — in one of the cohorts actually no longer needed injections. Those are those standard-of-care options that you mentioned, Todd. Basically called anti-VEGF injections. As you mentioned, they do have to be taken on an ongoing basis. Those patients no longer needed the injections, but we also saw improvement in vision and retinal thickness, two important points. They also released data related to another cohort. This was cohort No. 3. 50% patients, or half of them, haven’t needed those ongoing standard-of-care injections in the one and a half years since taking RGX-314. We also saw no serious side effects.
I want to go back to the injection piece just to put some of this data in context. You mentioned that these patients often have to go to the doctor’s office, get these injections into the eye on an ongoing basis. And in only about a third of these patients is there any improvement. Really, it’s about stabilizing the disease, slowing the progression. But when you think about it from a patient perspective, there’s a compliance component that is I think one of the reasons why you don’t see longer-term durability or even improvement — because patients don’t want to have to go into the office and get these injections on an ongoing basis. So, to see data like this, where not only the majority of patients in cohort No. 5 no longer need the injections, and we’re seeing the durability of response, is actually quite impressive.
Campbell: I think so. And importantly, you’re seeing that improvement in vision as well. I’m maintaining my vision, but I’m also seeing some improvements in that cohort No. 5, which is the one that had the shortest timeline that they were evaluating. I think all the patients were able to have at least five months of evaluated periods. 75% injection-free at five to six-month mark. The average improvement was four letters. For people who responded — the nine patients who responded — the average improvement was five letters on an eye chart. That’s pretty significant. You’ve now removed the need to have these regular injections. But, importantly, you’ve also restored some independence and some freedom for the senior taking this, because they can see better, and feel maybe a little bit more confident around their home and when they go out and about.
You mentioned that this is a multi-cohort. That’s because it was dose ranging. We’re trying to figure out the magic amount to be able to give patients. I think it’s great that we haven’t seen any serious side effects from increasing these doses. We’re seeing potentially even greater efficacy. Even in cohort No. 3, though, you still saw a really big improvement in letters overall at the one and a half year mark. I want to say it was nine letters. It’s going to be interesting to see whether or not over time, the letter improvement for this cohort No. 5 gets better or not. That’s something to keep watching from here.
This drug is not anywhere near approval yet. They’re thinking about starting a Phase IIB trial soon. You’re going to need to wait for a one-year data here, you’ll have to get the IIB trial through. Maybe at that point, they can file to get this on the market. But we’re still talking a few years out.
Jones: Yeah. They also have a program where they’re looking to study RGX-314 in diabetic retinopathy. That’ll be a Phase II trial that’s scheduled to start toward the end of this year. But, Todd, holistically, looking at the data, things look pretty good for RegenxBio. But, we actually saw the stock drop about 11% when they released the data. One of our followers, listeners on Twitter, Jonathan — thanks so much for tuning in with us — he asked, “What in the world is going on? This looks pretty good to me.” Todd, what can you tell us about the market’s reaction? It wasn’t just about RegenxBio here.
Campbell: Yeah. It’s possible that some of the reaction was to some competing data that came out of Adverum Biotechnologies, symbol ADVM. Correct me if I’m wrong there, Shannon.
Jones: That’s correct.
Campbell: OK, great. A relatively small company. They’re conducting a Phase I study for their own gene therapy that works similarly. They reported that of the six patients that they have dosed in that trial, at a median 34 weeks, none of them required anti-VEGF medication, so, Lucentis or Eylea. So, a lot of people may have looked at that headline and said, wow, at 34 weeks, 100%, all six of the six, didn’t need to take these injections. That theoretically, in their view, is better. It sounds better on the headline. I think that once investors digested some additional data, though, from the trials, and some additional information, realized how limited in scope that trial is for Adverum. I think they responded by bidding RegenxBio back up a little bit. But, it’s certainly something we’re going to keep an eye on. We’re going to watch Adverum closely from here.
Jones: Absolutely. You have a dueling gene therapy battle going on here. I have to say, Todd, to even be having a conversation about two potential gene therapies that could not only stop the progression of the disease, but actually improve quality of life, it’s incredible to me. The innovation and the science, and where we’re moving in the overall healthcare landscape is just amazing.
But, a lot to watch. Just like you said, it’s still early on. Yes, it seems like the stuff of science fiction, but it’s here.
With that, let’s turn and shift gears. We also got third quarter earnings from healthcare titan, UnitedHealth Group, ticker symbol UNH. That is parent company of the nation’s largest health insurer, UnitedHealth. Todd, I know health insurance stocks this year have been a little bit beaten up, especially as we head into election season. But in terms of earnings for UnitedHealth, how did they fare?
Campbell: I thought it was an incredible reaction in the market. I don’t know the last time I saw UnitedHealth actually rally 8% in one day. I think the excitement was driven by the fact that they beat both on the top and the bottom line, and maybe some of the commentary in the transcript seemed to think, “Listen, we’re pivoting, and we can handle whatever the political outcome happens to be,” is basically the message they were trying to convey, if you read between the lines in the transcript.
As far as the numbers go, like I mentioned, they beat on both the top of the bottom line. They reported revenue of $60.35 billion. That was up 6.7% year over year. That was a beat of $510 million. Their net margin did tick up a little bit overall as a company. It rose 0.3% to 5.9%. Again, insurance business is not a very high-margin business, so that’s solid. Their non-GAAP earnings per share was ahead of expectations by $0.12. They reported $3.88. That brought the year to date revenue to $181.3 billion, up 8% year over year. Importantly, Shannon, they also issued some guidance that looked pretty good on the bottom line as well.
Jones: Exactly. They raised full-year guidance to $14.90 to $15 a share. That’s about $0.15 higher than some of the previous forecasts. But Todd, when you peek under the hood a little bit, of course, you’ve got UnitedHealth’s insurance platform, but really, I think the star of the show this quarter was the Optum Health Services business. Looking high-level across each of their business lines, you saw double-digit revenue growth, which is pretty impressive.
Campbell: Yeah, Optum is the star, no question. Insurance business is mature, it’s not going to grow. It’s dependent largely on premium increases to grow that business. How much lower can the unemployment rate fall? They get a lot of business on the insurance side serving commercial, so, company-offered insurance plans. They do a lot business in Medicare and they do a lot of business in Medicaid. We’ll talk about that in a second. And then, of course, they’ve got the Optum business, which is their high-growth business. They have different components within Optum. They have OptumRx, which is their drug fulfillment arm. They have OptumInsight, which is a data analytics play. And then they have Optum Health, which is where they provide care and behavioral health services to patients. Those businesses are growing very quickly. We saw better than 13% year over year growth in Optum. We saw, like I said, about 4.5%, something like that, in the insurance business.
If you look at the top line numbers, and you’re wondering why they don’t add up, the insurance business was $48.1 billion in revenue and the Optum business was $28.8 billion. That obviously is greater than the $60 billion headline number. That’s because there’s some offsets between those two businesses. Optum provides some services to the insurance business, and you have to offset those or net them out when you’re reporting the top line number.
Jones: Yeah. One thing, in listening to the call, one area to watch, especially heading into 2020 — UnitedHealth tends to be pretty conservative with their guidance, but they did say they expect adjusted earnings-per-share growth to be around the lower end of their typical 13% to 16% goal. That’s not including the impact of any return of the Affordable Care Act health insurance tax being reinstated. That was suspended. They basically said that tax would affect EPS by about $0.50, with $0.35 of that weighing down results into 2020. That’ll be something to watch. But, for a company — you said it very well, Todd — they’ve been able to adapt to any political climate, any healthcare climate.
I think one other big question mark is, of course, all of the talk about Medicare for All.
Campbell: Mm, yeah. Medicare has been a very, very big component or part of their story for growth. Yes, the employer and individual market did well. They did $14 billion in premium revenue from that business. That was up $557 million. They added about one million lives in coverage in the employer and individual market. But if you look at the Medicare and retirement business, revenue was up double-digits, 10%, almost $2 billion to $20.7 billion. They’re making more money in the Medicare business than they are in the employer business. We’ve got a larger aging population because of Baby Boomers retiring. You’re seeing a greater push toward Medicare Advantage because you have things like caps to your out-of-pocket spending, which you don’t have in traditional Medicare.
I think there are some signs, some cautionary flashing yellow signs that investors need to be worried about. The 8% rally may have been some short covering rather than necessarily people going out and saying, “OK, I’m going to bet on this long-term,” because we do have some threats. I think, if you’re going out and buying this stock, you have to assume that, if the Democrats who are running on Medicare for All, if they win, then the way it’ll finally eventually shake out won’t be a traditional Medicare, but opening Medicare Advantage up to everybody. If that were to happen, that would be great for UnitedHealth. So, that’s one assumption that you might have to make.
I think the other assumption you might make is that we also remain fully employed. Obviously, if unemployment starts to rise because of any economic deterioration, then you’re going to see their employer business start to contract.
And then, you’ve got to watch closely the Medicare business as well. The Medicare business actually is down year over year. It fell to $10.7 billion, it fell about $380 million year over year. That’s because they’re covering less people. Part of that is by design, because they exited one state where they lost a bid or chose not to participate. But also, they’ve cited the fact that the eligibility requirements have tightened, and as a result, less people are being able to participate in the Medicaid program.
So, if you’re buying it, you’re assuming that Medicaid is going to stabilize; that Medicare Advantage is going to end up being probably the best vehicle for Medicare for All. There’s still some question marks.
Jones: Yeah, still some question marks and a lot to watch.
Alright, let’s dive into Pfizer. Pfizer, ticker symbol PFE, announced results from one of its Phase III clinical trials, affectionately called the JADE Mono-1 — that’s pretty fancy, Todd, I think — for its drug Abrocitinib for severe atopic dermatitis at a recent medical conference in Spain. Pfizer is basically hoping to get its drug across the finish line to become the first oral once-daily treatment option for patients. This is in a market where Dupixent is a blockbuster thanks to the likes of Regeneron and Sanofi, where they basically dominate. Before we get into the data, Todd, let’s start with, what exactly is atopic dermatitis?
Campbell: Eczema. That’s how most people know of it. It’s a skin condition that’s relatively common. It’s an autoimmune disease caused by inflammation. Symptoms include redness, itching, hardening, oozing and crusting. It’s pretty common, about 10% of adults and up to 20% of children worldwide. Because of its size, it is a blockbuster indication. Right now, as you said, the superstar, if you will, in that indication, is Dupixent, which won approval back in 2017 and is selling at a $2 billion per year run rate exiting the second quarter. I think the sales of Dupixent had doubled in the past year thanks to some label expansions and ongoing uptake. This is a very high-value market for Pfizer to be targeting with Abrocitinib. The data itself, Shannon, matches up pretty good. It’s solid. We’re going to get full data from two — there’s multiple studies that are being conducted. They most recently reported the Phase II. Results hit the endpoints, secondary and primary endpoints. The release more information into those trial results at an upcoming conference. Last week, they also did report, though, the full data set from the first — I think there’s three trials total — the first of the trials. That data we can look at and say, that also matched up. So, maybe that’s a good indicator of how the second trial did.
If you look at the response rates in patients… you can’t do apples to apples comparisons. You shouldn’t, with trials. It’s not a head-to-head trial. But that’s not going to stop anyone from looking at these results and saying, if the response rates are significantly lower than they would be for Dupixent, why even bother? If they’re significantly higher, maybe this is a good alternative to Dupixent. I think the results came in pretty much in line with what we saw in Dupixent during those trials.
Jones: Yeah, I agree. I think two things stood out to me in reviewing the data. Dupixent and Pfizer’s drug, I will say, have slightly different modes of action here. Dupixent, of course, already on the market, targets basically a protein IL-4 and IL-13, while Pfizer targets those plus one called IL-31. IL-31 is the one that’s believed to be behind the severe itchiness. This is where we’re starting to talk about quality of life. Again, as you said, Todd, we can’t compare this apples to apples because it wasn’t a head-to-head trial. But after 12 weeks, 57.2% of people on the 200 mg dose — that was the higher dose — saw at least a four-point improvement on the pruritus, or itch scale, as I like to call it. Those improvements actually started within two weeks. If you look at the prior Dupixent trials, we were looking at 36%, 41%, and 59% for 16-week rates. I think this makes Pfizer’s drug pretty competitive, especially when it comes to the itch.
There was also something else that stood out to me, and it was the safety question marks. All in all, both drugs seem to be pretty in line with each other. But if there’s anything that could hinder commercial viability, it could be the safety here. In Pfizer’s trial, we did see 20% of patients who did have that higher dose experience nausea. There was also nasopharyngitis. That was an 11% adverse event rate. Also, headache at 9.7%. They did see a rate of serious adverse events at 3.2% in both the 200 mg dose and 100 mg dosing arms. That was things like inflammatory bowel disease, throat infections, asthma, dehydration. If this drug gets approved, my question mark is just how much market share can they reasonably gain if they have a weaker safety profile, even if efficacy is pretty much the same across the board? With the JAK inhibitors in general, they all tend to come with some pretty hefty safety warnings, so it wouldn’t surprise me to see this. But, that is the one question mark that I have with this drug.
Campbell: Yeah. The market’s big enough for multiple players. There’s certainly going to be some people who don’t respond to Dupixent that therefore, if this other drug was approved, they theoretically could get prescribed that, and vice versa. So, I think that there’s an opportunity for both of these to be meaningful drugs. Like you said, as a Regeneron shareholder, the question you’re asking yourself is, Dupixent is their fast-growing drug that’s driving a lot of Regeneron’s growth right now; how big of a threat is this? I think it’s enough of a threat that you need to be paying attention. Pfizer is not to be trifled with. They’re a big company with very deep pockets. Obviously, they’ve got a very established marketing and sales department that can certainly get out in front of doctors and make a compelling case for trying it instead of Dupixent. So, you’re going to want to keep your eye on that. You’ll want to see that second trial, what those actual full data set was from that. We won’t have that until, again, an upcoming conference. We only have the one trial, the first trial results to parse. We’ll take a look at that. Maybe we’ll get back together and we’ll update investors at that point as well, so we can keep everybody have tabs on this.
Jones: Absolutely. And don’t forget, you’ve also got AbbVie in the mix with their own drug that is also being studied as well. But if all goes well, it looks like Pfizer could use the data from all of their trials to file for approval sometime next year. A lot to watch in this space. I love when I see competition heating up, especially with good science.
But in terms of Industry Focus: Healthcare show for this week, that’ll it do it for Todd and I. We want to thank you so much for tuning in! As always, people on the program may have interest in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. This show is being mixed by Austin Morgan. For Todd Campbell, I’m Shannon Jones. Thanks for listening and Fool on!